Buy on the Rumor, Sell on the News

An old saying that usually accompanies the buy high, sell higher strategy is to “buy on the rumor, sell on the news.”

This can be an effective strategy in many ways, but the investor must be aware of the circumstances. For instance, the rumor might have been fabricated with the intent of pushing the stock price up.

Financial consultants, advisers, or stockbrokers tend to discourage those who would buy any stock based on rumor. False rumors frequently appear regarding corporate takeover situations. The share prices advance, but then suddenly retreat to former levels.

In most situations it is best to leave the rumor alone. In fact, buying “on the news” can be appealing at times. Perhaps a better refinement would be: Do not wait for the buy out to occur.

For example, an investor might have bought X company at 23 or 24 rupees a share and sold on the news at 32 rupees, making a 8 rupees  per share gain in a couple of days.

 However, notice that there is not much time to make these decisions. The price quickly runs up and immediately starts to decay. Obviously, “sell on the news” means right away.

SPECULATIVE STRATEGY

Buying on rumor and selling on or after news is high speculation. Things change, and takeovers can fail to occur. Rumors reach the news media

 

 After the action has started Often, this is too late for the individual investor. Many sophisticated investors avoid rumor investing because of the uncertainty. It is more prudent to look for companies that might become attractive takeover candidates and have other desirable traits. Then, if these companies are not taken over, the investor still has a quality stock at a good price.

                                                   Source Stock market rules 3^rd edition, author Michal.d.sheimo